Bitcoin has opened up new ways of conducting financial transactions globally. You are no longer tied to the financial institutes of your local jurisdiction or local currency and can access international markets for more competitive rates.
Since Bitcoin is a global asset that trades all year round, alternative banking systems have sprung up to create support services and financial products for bitcoin holders. Some refer to them as shadow banks or digital asset wild cat banks, but that is not to say these institutions are unregulated. Many of them have to comply with various financial regulations as they integrate with the legacy system and the bitcoin network.
Centralised financial services platforms offer bitcoin holders the option of leveraging their bitcoin to earn an additional income on their reserves or to use it as collateral to issue a fiat loan. However new products are showing up each year, and we’re sure more are on the way.
The new banks
Earning interest on your money in traditional bank accounts is a thing of the past with 0% or even negative interest rates so Centralised Finance (CeFi) companies in Bitcoin have stepped in to fill the void. These companies operate much the same as your traditional bank used to in that you deposit your money (Bitcoin) and it earns you interest at a much more favourable rate.
Not only that but you can also borrow against your Bitcoin should you need fiat money for any reason with some of these services. Full details of how you can do this will be specified by the specific terms and conditions from these companies so make sure you know what you’re doing!
In any case, these CeFi applications require Know Your Customer and Anti-Money Laundering checks so make sure you have your ID ready to start earning some BTC yield. The other thing to be aware of is that you are handing over the custody of your Bitcoin to a third party which means you don’t have the private keys to the wallet so something to bear in mind.
As always, we recommend doing your own research but in Morpheus style from the Matrix, we can show you the door, you’re the one who has to walk through it! Learn about the different CeFi options below.
The bitcoin space is, and its financial on-ramps and off-ramps are still very much in the developmental phase. To help close the gap between traditional economic systems like the banks and the bitcoin blockchain. We’ve seen these new centralised companies spring up to provide a stop-gap solution.
These centralised platforms are custodial services that act as the broker or middle-man between legacy finance and you, the bitcoiner.
Since all transactions are conducted by an entity that is regulated or is subject to regulation, it is a centralised business. That’s where the term centralised finance comes from, the idea that the service they provide is tied to the company itself and not a smart contract platform.
Centralised financial platforms establish relationships with banks in different countries. They provide the infrastructure for banking services while taking on the risk of holding bitcoin on your behalf. A risk that many traditional banks aren’t willing to do at this point.
CeFi creates the potential for earning yield via bitcoin-based accounts that are functionally similar to a traditional bank’s savings accounts — but may offer substantially higher returns. Unlike conventional savings accounts, bitcoin deposits aren’t currently eligible for government-backed or insurance, so you should make sure to understand the risks involved. Some platforms, however, does offer a principal guarantee on deposits up to a point, but you will need to consult each platform’s terms and conditions.
Where does the yield come from?
Some or all of your bitcoin holdings are put to work and lent out to others. These borrowers pay the centralised provider an interest rate for borrowing, and that provider passes on some of the interest to you. Your bitcoin may be used as liquidity to cover “buy and sell orders” on the platform, or your bitcoin is borrowed to exchanges to provide traders with leverage or to trading houses that may require capital to complete a certain short term trade.
How does CeFi borrowing connect to CeFi saving?
CeFi platforms act as the middle man and take on the liabilities of all parties involved to facilitate the borrowing of money against your bitcoin holdings or lending out your bitcoin holdings. The model works the same way you’d use traditional assets as collateral to apply for a bank loan.
Some users will enter into contracts to borrow against their bitcoin and pay the loan back with interest. Then on the flip side, the interest users pay for borrowing money is where the yield you can earn for holding bitcoin via CeFi platforms. It’s up to the CeFI platform to strike a balance where there are enough loans issued with interest to cover their operating costs and pay their obligations.
Unlike bank loans, CeFi interest accounts or loans typically require little or no paperwork. Depending on the platform and the country, these platforms will allow you to use bitcoin to borrow up to 50% of its market value without a credit check.
If you do choose to use any of these platforms, please take note that in most cases, you will have to comply with KYC and AML laws, giving up your identity to these platforms. The data you provide may also be accessed by third parties that these platforms work with and taints the coins (UTXOs) moving in and out of this account as they are tied to your identity.
Additionally, when you use a CEFI platform, you have to give up ownership of your coins to access any of their products. They hold the bitcoin you send them on your behalf, and you receive a bitcoin IOU as you would with a bank. You may see a balance on the screen when logging into your account, but in theory, that is only a promise to pay once you withdraw your funds.
You are taking on third-party risk, such as:
- Their ability to correctly custody coins, that they manage their reserves properly
- That they have the liquidity to pay you out
- That their security practices are up to the task, so they are not hacked.
- The chance they won’t up and disappear
- That they won’t be taken over by a government and have funds seized.
In cases such as these, you may not have much say in getting your funds back, and it’s a risk you have to consider before committing to any of their products.
Centralised Finance Services
If you’re ready to explore some of these platforms, then check out the list below; by clicking on the platform name, you’ll be taken to a summary of their services and an overview of the platform. Alternatively, you can get started immediately by heading directly to their website.
|Abra||Bitcoin Interest Accounts, Bitcoin Backed Loans||https://www.abra.com/|
|BlockFi||Bitcoin Interest Accounts, Bitcoin Backed Loans||https://blockfi.com/|
|Celsius Network||Bitcoin Interest Accounts, Bitcoin Backed Loans||https://celsius.network/|
|Coin Homes||Bitcoin Backed Home Loans||https://coinhomes.com/|
|Hodlnaught||Bitcoin Interest Accounts||https://www.hodlnaut.com/|
|Ledn||Bitcoin Interest Accounts, Bitcoin Backed Loans||https://ledn.io/|
|Nexo||Bitcoin Interest Accounts, Bitcoin Backed Loans||https://nexo.io/|
|Piggy||Bitcoin Accounts, Bitcoin Backed Home and Car Loans||https://piggy.capital/|
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